Schawk announces second-quarter and first-six months 2009 results

Tuesday, August 11, 2009

Press release from the issuing company

DES PLAINES, IL, -- Schawk, Inc., a leading provider of brand point management services, enabling companies of all sizes to connect their brands with consumers to create deeper brand affinity, reported second-quarter and first six-months 2009 results. Net income in the second quarter of 2009 was $4.8 million or $0.19 per diluted share, versus net income of $0.8 million, or $0.03 per diluted share in the second quarter of 2008. For the first six months of 2009, net income was $2.5 million, or $0.10 per diluted share, compared to $5.0 million, or $0.18 per diluted share, in the comparable prior-year period.

Consolidated Results for Second Quarter Ended June 30, 2009

Net sales in the second quarter of 2009 were $112.0 million compared to $133.4 million in the same period of 2008, a reduction of $21.4 million, or 16.1 percent. Approximately $6.8 million of the sales decline quarter over quarter was the result of changes in foreign currency translation rates, as the U.S. dollar increased in value relative to the local currencies of certain of the Company's non-U.S. subsidiaries. The remainder of the quarter-over-quarter decline in sales was the result of a slowdown in the Company's business compared to the second quarter of 2008. Acquisitions contributed $2.5 million, or 2.2 percent, during the second quarter of 2009.

The slowdown in the Company's business in the 2009 second quarter was evident in all reportable segments. The United States and Mexico reportable segment, which represents more than two-thirds of the Company's sales, experienced a sales decline of $10.8 million, or 12.6 percent. Sales in the Europe segment declined $4.8 million, or 27.5 percent, of which $3.5 million was attributable to changes in foreign currency translation rates. Sales in the Other reportable segment declined $5.9 million, or 19.5 percent, of which $3.0 million was attributable to changes in foreign currency translation rates.

Consumer products packaging (CPG) accounts sales in the second quarter of 2009 were $74.8 million, or 66.8 percent of total sales, compared to $87.1 million in the same period of 2008, representing a decline of 14.2 percent. Advertising and retail accounts sales of $27.4 million, or 24.5 percent of total sales, in the second quarter of 2009 declined 22.9 percent compared to the prior-year period. Entertainment accounts sales for second quarter of 2009 of $7.3 million, or 6.5 percent of total sales, declined 13.9 percent compared to the same period in 2008. In response to adverse economic conditions, many of the Company's clients have reduced their levels of advertising, marketing and new product introductions and, particularly with respect to the Company's CPG accounts, have delayed packaging redesigns and sales promotion projects, resulting in lower revenue for the Company. However, despite the softness experienced over the past few quarters, Schawk's market share has remained strong across its client base. Furthermore, no major clients have been lost during 2009.

On a sequential basis, sales for the second quarter of 2009 increased $6.9 million, or 6.6 percent, versus the first quarter of 2009 driven by increases in CPG and advertising and retail account sales partially offset by a decline in entertainment account sales.

Gross profit was $42.9 million in the second quarter of 2009, a decline of $3.9 million from the second quarter of 2008. However, gross profit as a percentage of sales increased to 38.3 percent of sales from 35.1 percent of sales, largely attributable to the Company's cost-reduction activities implemented during 2008 and 2009.

Selling, general and administrative (SG&A) expenses declined $4.3 million, to $31.8 million in the second quarter of 2009 from $36.1 million in the second quarter of 2008, reflecting the Company's cost-reduction initiatives, partially offset by higher professional fees related to internal control remediation efforts and related matters of $1.3 million, and an increase of $0.7 million over the prior-year quarter.

In addition, acquisition integration and restructuring expenses declined $1.7 million to $1.5 million and expenses related to impairment of long-lived assets declined $2.1 million to $0.1 million in the second quarter of 2009 compared to the second quarter of 2008.

The Company reported operating income of $9.5 million in the 2009 second quarter compared to operating income of $5.3 million in the second quarter of 2008. The increase in operating income, compared to the prior-year period, was the result of reductions in SG&A expenses and improvements in gross margin percent, as previously described, coupled with reductions in acquisition integration and restructuring expenses, as well as a reduction in expenses related to impairment of long-lived assets.

Acquisition integration and restructuring expenses declined by $1.7 million to $1.5 million for the second quarter of 2009, as compared to the same period last year. The charges in the 2009 second quarter arose from the Company's previously announced plans to consolidate, reduce and re-align the Company's work force and operations and are for employee terminations, asset impairments, obligations for future lease payments and other associated costs.

The remediation and related expenses of $1.3 million, which is included in the Company's SG&A expenses, is principally due to an increase in the Company's costs related to the Company's internal control remediation and related matters.

During the second quarter of 2009, the Company reported expenses related to the impairment of long-lived assets of $0.1 million, which is a decline of $2.1 million compared to the prior-year period.

The Company reported a gain associated with foreign currency transactions of $0.3 million in both the second quarter of 2009 and second quarter of 2008. These transactions were recorded by non-U.S. subsidiaries primarily for unhedged currency exposure arising from intercompany debt obligations.

Interest expense in the second quarter of 2009 was $2.5 million compared to $1.7 million in the second quarter of 2008, due to higher interest expense payable under the Company's June 2009 amended debt agreements and a higher average debt balance during the period.

Income tax expense for the second quarter of 2009 was $2.3 million, compared to income tax expense of $2.9 million in the second quarter of 2008. The reduction in the effective tax rate for the second quarter of 2009 compared to the same period of 2008 was principally driven by the recording of a $1.5 million valuation allowance for the Company's UK subsidiary in the second quarter of 2008.

Net income in the second quarter of 2009 was $4.8 million, or $0.19 per diluted share, compared to net income of $0.8 million, or $0.03 per diluted share, in the second quarter of 2008. As discussed above, during the second quarter of 2009 the Company incurred acquisition integration and restructuring expenses of $1.5 million and remediation and related expenses of $1.3 million. Additionally the Company benefitted from a $0.3 million gain on foreign currency transactions in the second quarter of 2009. The income before income taxes was $7.1 million. Because of this income, the income tax provision for the second quarter was $2.3 million. Excluding the aforementioned items (net of tax effect), second-quarter 2009 net income was $6.5 million, or $0.26 per diluted share, compared to income of $5.7 million, or $0.21 per diluted share, on the same basis for the comparable prior-year period. Please refer to the tables at the end of this press release for a reconciliation of non-GAAP measures.

Other Information

Depreciation and amortization expense was $4.7 million in the second quarter of 2009 compared to $5.4 million in the second quarter of 2008.

Capital expenditures in the second quarter of 2009 were $1.1 million compared to $3.1 million in the same period of 2008.

EBITDA and Adjusted EBITDA Performance

EBITDA for the second quarter of 2009 was $14.2 million compared to EBITDA of $10.8 million for the second quarter of 2008. Adjusted EBITDA for the second quarter of 2009 was $15.7 million compared to $13.9 million for the second quarter of 2008. These results for EBITDA and Adjusted EBITDA are calculated consistent with the non-GAAP reconciliation schedule presented at the end of this press release.

Consolidated Results for Year-to-Date Period Ended June 30, 2009

Year-to-date sales through June 30, 2009, were $217.1 million compared to $259.8 million in the same period of 2008, a reduction of $42.8 million, or 16.5 percent. Approximately $14.4 million of the sales decline year over year was the result of changes in foreign currency translation rates, as the U.S. dollar increased in value relative to the local currencies of certain of the Company's non-U.S. subsidiaries. The remainder of the year-over-year decline in sales was the result of a slowdown in the Company's business compared to the same period of 2008. Acquisitions contributed $4.9 million, or 2.3 percent, during the first six months of 2009 compared to the prior year.

The year-to-date slowdown in the Company's business was evident in all reportable segments. The United States and Mexico segment, which represents more than two-thirds of the Company's sales, experienced a sales decline of $21.9 million, or 13.0 percent. Sales in the Europe segment declined $9.9 million, or 28.6 percent, of which $7.7 million was attributable to changes in foreign currency translation rates. Sales in the Other reportable segment declined $11.0 million, or 19.3 percent, of which $6.3 million was attributable to changes in foreign currency translation rates.

CPG accounts sales in the first six months of 2009 were $143.4 million, or 66.1 percent of total sales, compared to $167.0 million in the same period of 2008, representing a decline of 14.2 percent. Year-to-date advertising and retail accounts sales of $53.1 million, or 24.5 percent of total sales, declined 26.2 percent compared to the prior-year period. Entertainment accounts sales of $15.6 million, or 7.2 percent of total sales, declined 12.0 percent.

Gross profit was $76.0 million in the first half of 2009, a decline of $13.7 million from the prior-year period. However, gross profit as a percent of sales increased to 35.0 percent of sales from 34.5 percent of sales, which is largely attributable to the Company's cost-reduction activities implemented during 2008 and 2009.

Selling, general and administrative (SG&A) expenses declined $6.7 million to $65.7 million in the first half of 2009, from $72.4 million in the comparable prior-year period. The reduction in spending reflects the Company's cost-reduction initiatives partially offset by higher professional fees related to internal control remediation and related efforts of $3.3 million, an increase of $2.7 million over the prior-year period.

In addition, acquisition integration and restructuring expenses declined by $0.9 million to $2.3 million and expenses related to impairment of long-lived assets declined by $2.1 million to $0.1 million in the first six months of 2009 compared to the same period for 2008.

The Company reported year-to-date operating income of $7.9 million in the first six months of 2009 compared to $12.0 million in the same period of 2008. The decrease in operating income, compared to the prior-year period, was the result of the decline in sales volume during the period partially offset by reductions in SG&A, acquisition integration and restructuring, and impairment of long-lived asset expenses as previously described.

The acquisition integration and restructuring charge in the first half of 2009 arose from the Company's previously announced plans to consolidate, reduce and re-align the Company's work force and operations. As a result of these actions, the Company incurred costs of $2.3 million for employee terminations, asset impairments, obligations for future lease payments and other associated costs.

The remediation and related expenses of $3.3 million, which is included in the Company's SG&A expenses, is principally due to an increase in the Company's costs related to internal control remediation and related matters.

The Company reported a year-to-date gain associated with foreign currency transactions of $0.4 million compared to a gain of $0.5 million on foreign currency transactions for the same period in 2008. These transactions were recorded by non-U.S. subsidiaries primarily for unhedged currency exposure arising from intercompany debt obligations.

Interest expense for the first six months of 2009 was $3.9 million compared to $3.5 million in the comparable prior-year period, primarily driven by higher fees related to the Company's June 2009 amended debt agreements.

Income tax for the first six months of 2009 was $1.6 million, compared to $3.6 million in the second quarter of 2008. The reduction in tax expense in 2009 is driven primarily by the lower income for the period. The reduction in the effective tax rate for the first half of 2009 compared to the same period for 2008 was principally driven by a higher proportion of earnings in jurisdictions with lower statutory tax rates.

Year-to-date net income was $2.5 million, or $0.10 per diluted share, compared to net income of $5.0 million, or $0.18 per diluted share, in the comparable prior-year period. As discussed above, during the first half of 2009 the Company incurred acquisition integration and restructuring expenses of $2.3 million and remediation and related expenses of $3.3 million. Additionally the Company benefitted from a $0.4 million gain on foreign currency transactions in the first six months of 2009. The income before income taxes was $4.1 million. Because of this income, the income tax provision for the first half of 2009 was $1.6 million. Excluding the aforementioned items (net of tax effect), year-to-date net income was $5.9 million, $0.24 per diluted share, compared to income of $8.4 million, or $0.30 per diluted share, on the same basis for the comparable prior-year period. Please refer to the tables at the end of this press release for a reconciliation of non-GAAP measures.

Other Information

Depreciation and amortization expense was $9.5 million in the first six months of 2009 compared to $10.9 million in the prior-year period.

Year-to-date capital expenditures were $2.4 million compared to $5.5 million in the same period of 2008.

During the first six months of 2009, and specifically in the first quarter of 2009, the Company repurchased 488,700 shares of its stock for a cost of approximately $4.3 million. The Company has suspended its share repurchase program.

EBITDA and Adjusted EBITDA Performance

EBITDA for the first six months of 2009 was $17.7 million compared to EBITDA of $23.1 million for the same period of 2008. Adjusted EBITDA for the first half of 2009 was $20.0 million compared to $26.2 million for the comparable prior-year period. These results for EBITDA and Adjusted EBITDA are calculated consistent with the non-GAAP reconciliation schedule presented at the end of this press release.

Cost-Reduction Activities

The Company incurred acquisition integration and restructuring charges of $1.5 million in the second quarter of 2009 and $2.3 million for the first half of 2009. These year-to-date charges are anticipated to result in total annual savings of approximately $10.0 million (estimated $7.0 million to be realized in 2009) and is part of the Company's previously announced actions for 2009. Furthermore, the Company has taken other specific 2009 cost-reduction actions expected to reduce expenses approximately $6.0 to $7.0 million for the year. The Company will continue to evaluate opportunities for further cost-reduction activities, as they arise.

Financing Update

During the second quarter of 2009, the Company reduced its total debt $33.2 million, to $113.0 million, compared to total debt at March 31, 2009. The reduction in debt was driven by $20.0 million in pro-rata payments to the Company's lenders, as required under the Company's amended debt agreements, and additional payments against the Company's revolving credit facility during the quarter. At June 30, 2009, the Company had $17.1 million of cash, as well as a revolving credit facility of $80 million, of which approximately $27 million was available.

Full-Year 2009 Sales and "Adjusted EBITDA" Guidance

As previously communicated in the Company's press release for its first-quarter 2009 financial results, full-year revenues are expected to range between $440 to $450 million, and Adjusted EBITDA (as calculated under the terms of the Company's amended debt agreements) to range between $43 to $51 million. The Company bases these annual estimates on a current expectation that consumer spending will modestly increase during 2009, CPGs, retail and corporate brands will increase the frequency of their product innovation and promotional activities in response to competitive pressure, and that the Company's cost reduction activities in 2008 and during 2009 are anticipated to lower the expense base of the Company.

In the event that consumer confidence is more than modestly increased, the Company expects that its revenue and Adjusted EBITDA will exceed initial projections. In addition, the Company presently expects that current cash balances and anticipated cash flows from operations and other activities will be sufficient to fund debt service as well as debt reduction through the end of 2009 without hindering the Company's ability to focus on the services provided to its clients.

Management Comments

President and Chief Executive Officer David A. Schawk commented, "Second-quarter sales demonstrate that the economy continues to be challenging. However, on a sequential basis, second-quarter 2009 revenue increased nearly $7.0 million over the first quarter of this year. This revenue increase allowed us to further leverage our cost-reduction activities to improve our overall operating income.

"As such, we experienced substantial improvement in margins in the second quarter of 2009. Gross margin improved to 38.3 percent in the second quarter of 2009 from 35.1 percent in the same period of last year. Additionally, despite a nearly $21 million decline in revenue, second-quarter operating income was approximately $9.5 million compared to $5.3 million in the second quarter of 2008, reflecting the benefits of our cost-reduction activities as well as reduced expenses for restructuring and long-lived asset impairments. We are pleased that our cost reduction initiatives have made an important contribution to the improved financial profile of this Company, and we are comfortable that the reductions and initiatives we have undertaken have not impacted our ability to serve our clients, but rather, have prepared us to better serve our clients when the economy returns to growth.

"Compared to the prior year period, second-quarter 2009 revenue fell approximately 11 percent excluding the effects of foreign currency translation, as clients continued to curtail or delay spending. However, despite the volume declines, Schawk continues to maintain its portfolio of clients without any major losses during the year."

Schawk continued, "We continue to take steps to better utilize our global capacity while reducing our overall cost base, and as a result of the successful implementation of our restructuring actions thus far in 2009, we now expect to generate almost $10.0 million in annual cost savings, which is $2.0 to $3.0 million higher than previously expected. These savings are incremental to the other 2009 cost-reduction actions expected to reduce expenses approximately $6.0 to $7.0 million for 2009.

"Given our performance during the second quarter and progress on implementing our cost-reductions actions for 2009, we are reaffirming the full-year revenue and Adjusted EBITDA guidance provided in the first-quarter 2009 earnings release."

Schawk concluded, "We believe we entered this economic downturn in the best position in our industry, with the ability to deliver end-to-end, all-encompassing solutions. Along with other changes we have implemented, our platform in Brand Point Management allows us to use the right assets, for the right clients, at the right time, and in the right place. This has made Schawk operationally stronger than we were before. As clients everywhere respond to economic challenges seeking to consolidate their purchases, simplify their processes, modify their products and streamline their procedures, we believe that no other Company in our industry can match the solutions that Schawk can offer its clients."